You Can Do Too Much Due Diligence

It's Monday, time for another lesson I've learned in the venture capital business. Today I will tell a story that I love telling. It has some of my favorite people in it.

Back in 2004, early in my blogging career, I heard about a service that had just launched called Feedburner. It provided a number of useful services for a blog's RSS feed. So I went and signed up and AVC became one of the first users of the service. I immediately liked the service and the idea. So I contacted the founder/CEO Dick Costolo, who has gone onto bigger and better things. I told Dick that I was interested in making an investment in Feedburner. My friend Brad Feld was also talking to Dick about the same thing so we decided to do the investment together.

As part of our investment process, we do a bunch of fact gathering/checking work that is called Due Diligence in the vernacular of the VC business. So my partner Brad Burnham and I put together a list of leading blogs and online publishers who had popular RSS feeds at the time. I think there were a dozen or so publications on that list. It included Weblogs (Engadget), Gawker (Gawker), NY Times, and a bunch more. We know most everyone who ran those operations so we called them.

What we heard was surprising. Not one of them was willing to hand over their RSS feed to a third party for analytics and monetization. We were very surprised to hear that and thought a bit about it. But, we decided, we could not invest in something that the big publishers would not support. So regrettably, I called Dick and told him we had to pass and why. Brad Feld went ahead with the investment and Feedburner closed their round without USV.

About six months later I ran into Dick at an industry conference. We decided to grab lunch together and during lunch he said to me "you know those dozen publishers you called?" I said "yes, what about them?" He said "every single one of them is on Feedburner now."

I was pissed. How could that be? So I said to Dick, "Would you consider letting us into that last round we walked away from." He said "No, but I will let you invest at a 50% increase in price". We did that and became an investor in Feedburner. And that worked out well when Feedburner was sold to Google a few years later.

So what did I learn from this lesson? First, trust your gut. I was using Feedburner and knew it was a very useful service. I felt that others would see that too. They did, but it took some time. Second, I learned that a service can get traction with the little guys and in time, the big guys will come along. I have seen that happen quite a bit since then. And finally, I learned that you can do too much due diligence. It's important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc. You cannot rely alone on due diligence, particularly early on in the development of a company and a market.

#MBA Mondays#VC & Technology

Comments (Archived):

  1. Carl Rahn Griffith


    1. Charlie Crystle

      damn you’re early 🙂

      1. Carl Rahn Griffith

        GMT 😉

    2. William Mougayar

      aka Incompetency/Dishonesty.

    3. JimHirshfield

      What instinct did they follow? 😉

  2. Charlie Crystle

    Nice exit.The reason you hear the same song over and over on the radio:”People don’t know what they like, they like what they know”.Which is the same reason startups need to embrace and love sales and marketing, and investors need to look at sales and marketing efforts. The first time a prospect considers something is not likely when they’re ready to adopt, embrace, or buy.

    1. Kirsten Lambertsen

      “People don’t know what they like, they like what they know”. I can’t believe I’ve never heard that one before. It’s great.

    2. ShanaC

      reminds me of “the opposite of love is indifference” – if they have a reaction they might be onto something

  3. Richard

    In 5 years you can update the story with coinbase (which is going to be one of the best trust your gut success stories of all time)

    1. fredwilson

      from your mouth to god’s ears

  4. David Smuts

    One would hope this ability to go on ‘gut instinct’, and that instinct being an experienced one, is what differentiates VC from private equity. Providing an agility and insight (albeit a bit riskier) of VC over PE investing.Regrettably for many Entrepreneurs the VC funding round is dragged down by excessive due-diligence.

  5. jason wright

    instinctthe animal inside, or the monster.this morning i watched your interview with Howard Lindzon again, and he was still mad that you didn’t force him to invest in twitter and zynga.

  6. baba12

    “trust your gut instincts or your heart” that statement refers to going with what the deeper limbic part of the brain feels. As Simon Sinek points out in his description of the “Great Circle”Question is if USV ad Mr.Wilson invest in people/companies because of WHY those people do what they do or do they invest because of what they do.

    1. fredwilson


  7. WA

    Leaving the adage “Mimicry is the highest form of flattery” (and return?) in place.

  8. leigh

    there’s a mcluhan quote about not looking backwards into the future that i love.we get the same thing when designing UX all the time… a redesign we did for GMCanada – we wanted drop down menus – no one had them – and they failed in xcountry testing. The client didn’t care bc she liked them and recognized that just bc large corp weren’t doing it didn’t mean it wasn’t the right thing to do.leading isn’t about what the other guys do.

    1. Ana Milicevic

      > leading isn’t about what the other guys do.Hear, hear.

  9. William Mougayar

    And you had the guts to ask in, 6 months later at the same price. Was it a gutsy move or because maybe they didn’t get fully subscribed at that initial round?

    1. fredwilson

      because i am all about getting the very best price for me and my partners. i hate paying up. absolutely hate it.

      1. kirklove

        I can attest to that at the breakfast table. #TabSlam!

        1. falicon


        2. howardlindzon

          ha. he always picks up my tab. #wallstrip!

      2. LE

        “the very best price for me and my partners”But you did get the best price at that point in time because it reflected what was further known about the investment at that time vs at the start. It was a safer investment. A surer bet. Not quite a toaster[3] but…Besides people have no incentive to get off the fence if they feel they can make the same deal later. Important point. This is as basic as it gets. The car dealer wants you to sign today he isn’t going to tell you you can get it for the same price any day you walk in. Otherwise what’s the rush? (Lesson learned from my dad when shopping for cars at a young age and has proven correct over many years.)Back in the 90’s I got a company to pay me $50,000 for an option on a domain because they needed to take the weekend to get the board to approve the decision. I said there were others interested (complete fabrication[1]) and it would be to late. They fedexed the check and then bought the domain the next week for the asking price after getting approval. The deposit was a significant motivator. I’m always totally amazed at the people that don’t do this when they are on the other side of a transaction.Another example of a deadline: With a restaurant wanting to rent a parking lot from our condo association. I told them the condo board needed to approve the decision and that they had to agree to the price I asked for or the board wouldn’t consider it until the next meeting which was +- 3 months later. [2] I knew that they really didn’t need the extra spaces (I had been monitoring the traffic they were receiving [4]) and if I gave them more time they might back out entirely. It was a good move because they paid us for 5 months rent and never parked a single car on the lot. What fun.Most important in all of this (as is in your story) is that details and nuance matter. You can’t always bluff as the other side might not be as committed to the deal and simply walk away. Every situation needs to be read differently. In these two example I felt I could pull this off. I don’t or can’t do it like this every time.[1] Bluffs don’t always work but they work enough to be effective. Besides I had a plan b if the bluff failed.[2] While this was true any business person would have realized that for the money that was being waved in front of a condo association they could have approved it by phone or email etc. and called the bluff. They didn’t.[3] The saying “if you want a guarantee buy a toaster”.[4] This was simple matter of driving through their lot on Friday and Saturday nights and seeing the change in cars in the lot as well as talking to a few merchants in the same shopping center.

  10. JimHirshfield

    So those dozen publishers didn’t “buy” from you, but they bought from Dick and R.Klau. Let’s see the follow up blog post on how you’ve improved your sales pitches over the years. 🙂

  11. reece

    the thing that sticks out to me is the dynamic between you and Brad Feld…did he do the same diligence and ignore it? did you tell him what you’d learned and he just ignored you?just interesting to think through the dynamic of one investor dropping out and another still going for it and why…

    1. fredwilson

      Because he figured the point of this post before I did

    2. bfeld

      I’ve never made my decisions based on what potential co-investors come up with, even ones who I respect and love like I do Fred. I’ve had a deeply held belief – ever since I made my first angel investment in NetGenesis in 1994 – to make my own decisions. I listen to whatever data emerges but I try to completely ignore external conclusions from others on my way to an investment decision – either positive of negative.In this case I don’t think I ignored the data, I just ignored the conclusion.

      1. reece

        makes sense and smart moveIMHO, there is no stronger sign of a good investor than someone who’s not afraid to go for it, regardless of “social proof” et al

        1. fredwilson

          social proof is bullshit. i hate it. it’s the worst. it’s momentum investing called something else.

          1. falicon

            It’s way worse from this side of the fence… 😉

      2. Dasher

        Bravo. Non consensus && right = Win.

  12. pointsnfigures

    Risk/Reward. Careful balance. Risk taking can be learned. However, much of the VC world (and angel world in a lot of cases) relies only on diligence. No one teaches risk/reward very well in MBA school, investment banks, consultant firms. Guess where a lot of the VC partners come from? I learned to take risk in the school of hard knocks.

  13. LIAD


    1. takingpitches

      Nice.Comfort zone = personal stagnation

    2. JLM

      .Stealing this graphic. Will attribute it to you.Well played.Consider it well stolen by me.JLM.

      1. LIAD

        don’t sweat it. Isn’t mine. Don’t remember where I found it.

        1. JLM

          .Ummm, maybe I made it up?Yeah, that’s the ticket. Haha.[The Liar from SNL.]JLM.

          1. LIAD

            was rummaging through old notes last night and came across this. TOO GOOD! Know who wrote it? :-)———“We are driven most firmly by our insecurities.Give me poverty, deprivation, hunger, prejudice, inequality, unfairness —- and a yoke.Strap that yoke on and pull anything to the finish line fueled by those perceived inadequacies.No revolution was ever started on a full belly.Nothing to lose and everything to gain. Dangerous people.”

          2. JLM

            .Ummm, that would be me? It is easy to recognize as it is true, true, true.Yeah, that’s the ticket.JLM.

          3. David Semeria

            Well-played yourself, JLM

          4. JamesHRH

            This is the lesson that is lost on the 1%ers who tilt the system & syphon capital out of the economy.You need full bellies and lots of people with something to lose – otherwise you become a revolution waiting to happen.

          5. pointsnfigures

            don’t like your characterization of the 1% as leeches. It could just as easily be said the ones on govt assistance are leeching. Generalizations don’t work. There would be zero VC funds if it wasn’t for the 1%, and 0 angels.

          6. Charles Baker

            Actually, that is not true. A large percentage of the venture funds in Silicon Valley receive their capital from state employee pension funds. A lot of VCs basically report to the chief investment officers that run those state pension funds.

        2. Dan T

          gaping void is source? looks like something he would draw

        3. leigh

          best reference i could find was here although not sure it’s his (dsn’t look like it’s gaping void)

      2. howardlindzon

        i am repurposing 🙂

    3. JamesHRH


    4. ShanaC

      should animate and the borders should touch – magic happens right after you start leaving your comfort zone

    5. Reinvent_Ed

      Nice graphic.

    6. NAYAK Harish

      What a excellent explanation? Wow….!

    7. MU33

      You probably got it from Hagy is brilliant.

    8. Techman

      Nice picture. I think this was the perfect timing for it.

    9. Abdallah Al-Hakim

      It is hard to miss this graph in the comment section! Will definitely join others in repurposing.

  14. takingpitches

    If you could reduce it to due diligence, you would be an Excel jockey and doing mega LBOs.I love that being a successful VC is about the gut.

      1. takingpitches

        Thanks for that rec Carl. Now added to the reading list.

  15. Barry Nolan

    I was talking to an ex Salesforce exec recently. He described their early strategy as ‘bitting at the toenails of Siebel’ $50 a time. Siebel was $18k a seat back then and derided salesforce as

    1. Ana Milicevic

      For enterprise/B2B it’s often a good strategy to aim for mid-market and compete aggressively on price with the big guys. Once you have critical mass of smaller customers you establish credibility to pass muster of most procurement departments.

      1. PhilipSugar

        And you have completed more of your feature set.

      2. Barry Nolan

        Totally. Focus on sweet-spot customers: those with the most urgent need and minimal bureaucracy. With traction comes validation and iterative feature development.

      3. ShanaC

        good advice

    2. Carl Rahn Griffith

      Hubris, defined.

    3. awaldstein

      I was responsible for pulling Siebel out and putting Saleforce in a large enterprise company.Siebel came out of my budget. Upside from productivity was credited towards my division P & L.Never hesitated for a second.

      1. David Semeria

        So much insight in so few words.Well-played Arnold

    4. kidmercury

      i’m not a fan of siebel though i think salesfarce is fairly accurate. that company is probably never going to turn a profit thanks to how they are paying executives huge salaries through stock options. it’s going to make tech stocks look even more silly.

  16. SD

    Great postI love the statement about how you can get traction with the little guys, and the big guys will come along.This is so true – the big guys need to have proof points because opportunity cost of failure is high. But little guys need to be guerilla fighters, and have to be more opportunistic. Big guys adapt when they see something working for the little guys.To me, a big lesson in all of this is that “no” often means “not now”, or “show me a path to yes that I understand”. Build bridges with the big guys, know you will get a lot of “no’s” for now, and in parallel, nurture your little customers to make them advocates.This is hard because #1, rejection is no fun, and #2, it feels a lot harder to get lots of small customers than a few big customers.

    1. awaldstein

      Nicely said.There are interesting exceptions. The movie biz is a good example.We have 3D everywhere now (whether you like 3D it or not) because of Disney who decided to take a huge (huge!) risk with Chicken Little and help fund the implementation of digital projectors, new screens, glasses for, for them, a really small amount of theaters, then create the movie.

  17. PhilipSugar

    There is nothing more motivating to getting customers than hearing somebody tell you I’m not doing this because you don’t have enough of said customers. Whether it be investors, acquirers, or even potential customers.There also nothing more enjoyable than charging a big premium when they come around (sorry about that)

    1. falicon


    2. JamesHRH

      Or, when they tell you they can do it themselves, but then come back and admit they cannot – also known,as “Hi, my name is Bill Gates.”

  18. Kirsten Lambertsen

    Another great, instructive anecdote. My favorite kind of AVC post.Was getting those clients a key component of Feedburner’s roadmap for success at the time? Or was it just USV that felt it would be essential?

    1. fredwilson

      They had an ad model so we thought they would need high volume publishers

  19. Raj

    I believe you referred to this as a “head fake” when you finally made the investment.

    1. fredwilson


  20. pointsnfigures

    on the other hand, the Angel Capital Association has said there is a correlation between how long you do due diligence and success. That being said, I find it’s an excuse for a lot of people to avoid taking risk (yet posturing as an investor) or-they get bogged down in figuring out every single angle and alley and never make a decision-or have too much data to make a good decision.It’s a blend of gut and data. The important thing in this post is that they did diligence, but maybe Fred was talking to the wrong people as users. What if he would have talked to the initial users and then followed his gut?It also turns out Dick Costolo is a damn good jockey.

    1. bfeld

      I’d love to see the actual data behind the ACA assertion. That sounds like “conventional wisdom” rather than a data driven conclusion.

      1. pointsnfigures

        At the recent ACA conf in SF, they said last yr 20B is invested by angels in 50,000 companies annually, and 20B is invested by VC in 3000 companies. They cited NVCA stats, and J. Sohl, CVR, Univ of NH. I think the HALO report showed the median pre money val of companies in seed was 2.5M, median raise 600k, and 66000 companies were funded last year.went through my old notes and found the data: (Witbank Study Kauffman Nov. 2007)530 angels, 3097 investments, 1137 exits and closuresmean time on due diligence was 20 hoursreturn for less than 20 hours=1.1xreturn for more than 20 hours=5.9xreturn for more than 60 hours=7.1x

        1. bfeld

          How does that data indicate a “correlation between how long you do due diligence and success”?

          1. pointsnfigures

            sorry, misunderstood. That’s different data!! Had an ACA guy present to a Hyde Park Angels workshop last summer. I don’t recall his name, but he was from Washington DC. That’s the one thing I remembered from his presentation. Good due diligence done correctly will take 3-6 months.My personal opinion is the diligence on the data doesn’t take that long. Establishing a relationship with the entrepreneur(s) does. We are human….I won’t invest unless I am comfortable with the team. At the stage of the company I invest at, I bet on jockeys more than ideas.

    2. Patricia Smith

      I do qualitative research for a firm which works with equipment/materials manufacturers. More often than anyone would admit, no due diligence was done the first time around and an offering crashes. There’s definitely a balance between guts and data (and how you pose your questions – a neutral party brings less bias to the table:)

  21. jmcaddell

    Fred, this is a great mistake story. “Don’t overdo due diligence” applies to entrepreneurs as much as investors. If you investigate any idea enough you will find ample reasons it won’t work. If you are a strong believer in your idea (or the people behind the idea), better to try some small, cheap steps rather than continue to think about it or back away. The direct evidence you get from those early steps is far more illuminating than any arms-length due diligence you can do.I liken working with early stage businesses (as investor or founder) to driving at night on an unfamiliar road. There will be curves up ahead which are beyond the reach of your headlights. All you can do is drive under control till what is up ahead becomes visible. But better to drive than wait. If you wait till daytime, you will be late.

  22. awaldstein

    Nice post Fred.I can’t speak to this from the VC side, but with product, marketing, pricing decisions in early stage especially, data poor and still being defined markets, the analog is similar.You simply gather what you can, talk to your customers, go work out, lock yourself in a room with a whiteboard then simply follow your informed gut.

  23. Aaron Klein

    I am loving this new MBA Mondays largely because I am living vicariously through them. We have investment advisors swarming our service right now. They love how it helps them infuse the investing process with data and win new clients.I was at a CEO summit for our industry a few weeks ago and the semi-retired chairman of one of the big firms listened to me talk for a minute with a smirk, and then said “you know, that’s just not interesting at all. If it was important, we’d just build it ourselves.”I walked away from that event with more inbound interest from the mid-sized industry players than it felt like we could handle. We’re going to keep vacuuming up this network and we look forward to the day when that big firm comes aboard as well.Although, they’re going to get a better deal if they don’t put their Chairman in the negotiations. 😉

    1. takingpitches

      the sneer of the dinosaur is great motivation and often validation

      1. Aaron Klein

        You bet it is 🙂

    2. awaldstein

      vacuuming the market–nice!

      1. Aaron Klein

        That’s the goal 🙂

      2. Matt A. Myers

        Great visual

    3. bfeld

      I love when people say “if that’s important we’ll just build it ourselves.” They almost never do and it almost always means there is an opportunity.

      1. Aaron Klein

        It definitely made me smile. I’d love to see them try… 🙂

        1. PhilipSugar

          That would be the best thing ever. Then what you can do is tell the others, we can do this for 1% of what they spent!!!!I absolutely love that. Get a huge co to build it internally. That takes away the huge hairy gorilla of no decision. SmallerCo: we have to have do this too, how do we do it???Buy our stuff. Best sales material ever.

          1. Aaron Klein

            That risk/reward tradeoff is high. Think about how many engineers you have to redeploy off existing projects to build that, or hire to maintain it.All of a sudden, doing a deal with us doesn’t seem like that big of a problem.

          2. PhilipSugar

            Competing against internal development at BigCo????Candy from a baby.

      2. PhilipSugar

        So true. I love “we’ll build it ourselves”. Put call them back every six months to see how that is going.

        1. Aaron Klein


      3. jason wright

        it’s a deeply closed inlook

      4. JamesHRH


      5. panterosa,

        Almost the same as people thinking it’s easy enough to make a Jackson Pollock.

    4. ShanaC

      insulting is never a good plan (edit: see the chariman)

      1. Aaron Klein


    5. howardlindzon

      nice job aaron

      1. Aaron Klein

        Thanks, my friend.

  24. falicon

    This is easily my new favorite AVC post. I suspect I will revisit and reference it many many times in the future. Thanks!

  25. andyidsinga

    sounds like the other lesson is: waiting for a certain kind of product / customer traction can mean an increase in price. (?)

    1. fredwilson

      for sure

  26. Joe Marchese

    Thx for another data point in support of AND instead of OR. The hard stuff (due diligence) informs the soft stuff (assessment of people, judgment, or a gut call). Tipping too far toward one over the other often sub-optimizes the result.

  27. Jason C

    It’s interesting how a flurry of information can cause second-guessing or cloud judgement. You would think we would learn from this but most people would default to having more information than trust their instinct.As for blogging, I remember learning HTML in college during the Web 1.0 era and building a website for myself on the university’s network. I would put up random thoughts every so often (all hard coded into the html files). After a while, my website link got passed around I garnered a small following. I never realized the power a blog gave to a voice. Thankfully, that site is gone and people can’t see the posts of a idiot college student.Speaking of posts, how about Roy Hibbert dominating the post on Saturday? My Pacers finally showed up and played that tough, ugly style of basketball.

    1. fredwilson

      roy is having a great series. he is outplaying Chandler

      1. Jason C

        Word is that Chandler is hurt much more than the Knicks are letting on.

  28. dan_malven

    Fred,The story brings back some memories. I’ll add a little more context. Brad didn’t come in until the B. Prior to that, Dick had asked me to assemble a group of “smart angels” to lead a $1M Series A, and I did my diligence and agreed to do that and had reached out to you as one of the group. You were blogging a lot and was clearly one of the “smartest angels” in the market for something like this, so Dick and I both wanted you in it. You passed on the A….I don’t remember the specifics of why you passed on the A (it could be because it was a non-starter because you had raised USV 1 already and couldn’t do angel investments anymore….), but ultimately it didn’t matter because Matt McCall and Ed Chandler at DFJ Portage aced me out on doing the A when they invested $3M out of their fund.Since I didn’t get to invest in the A, Dick asked me to be on the advisory board, so I did that, and I do remember the conversations we had about why USV passed on the B, as you relayed in this post.I’d like to share with the community the diligence I did, and what got me over the hump. I never asked any publisher if they would use the service. It was obvious that they would need to manage and monetize their feeds. The question I focused on was “is it a hard enough engineering problem that they will have to hand it over to somebody else?” If it was, then Feedburner was going to get traction.I do remember you saying to me after you passed on the B that some of the publishers you talked to went to their CTO’s, who all said “I could build that [what Feedburner does] in a weekend.” So I think the unspoken complete sentence in your post is “Not one of them was willing to hand over their RSS feed to a third party for analytics and monetization…for a service they think they can build themselves in a weekend”.The reality is that what Feedburner did was a very complex engineering problem that the publishers would not want to invest enough resources in to build themselves. I focused my diligence on talking to Dick and Eric Lunt (Feedburner’s CTO) about the engineering aspects of the service, and that’s the conclusion I had come to. And I was totally OK with the fact that the big publishers didn’t understand that yet…in fact I liked that they didn’t understand that yet because it meant that it wouldn’t be a very competitive market for a while.So for me, it wasn’t about doing too much diligence or trusting my gut as it was about doing diligence on that topic and ignoring the rest of it as noise.

    1. bfeld

      Yup – I led the B. I learned about FeedBurner when I became publisher #699 shortly after I started blogging (I’m 99% sure I learned about it from Fred).FYI – Portage only did $1m in the Series A round.

    2. JamesHRH

      This is almost a carbon copy of MS DOS & IBM, isn’t it?Great story.

  29. Elia Freedman

    There are also seems to be a great lesson in here about staying in touch with investors you want that pass in the early rounds. There may be an opportunity later on. Dick proved traction, you invested, and then got involved together again at Twitter.

  30. LE

    “He said “every single one of them is on Feedburner now.”I was pissed. How could that be?”Well besides the obvious points that others have made that people don’t always know what they want perhaps the selling job done by the Feedburner sales staff was simply better?”Not one of them was willing to hand over their RSS feed to a third party for analytics and monetization.”So this could be an example of lack of social proof. One of the ways you get people to buy into something (may or may not have worked just throwing it out there) is to tell them that other companies that they admire have or will be signing up for the idea. That works and there are many other sales techniques that one learns over time. [1] You were simply asking them what they thought, you weren’t selling them. Selling encompasses getting over objections and, most importantly, manipulation and a host of other mind games. At least when the fruit isn’t low hanging that is. Lest anyone thinks the world just beats a path to your door with a better mousetrap.[1] Look, if you asked me before I had children if I would want someone in the house helping out (day nanny) I would have said “no way”. But faced with having to do the work myself that became a super attractive solution that I totally embraced and it wiped that bad attitude and “no way” right off my face. In trying to sell me before children on this idea all you would have to have done is simply say “ok that’s fine we won’t have anyone in the house helping so make sure you are home from work and around to help out”. That would have closed the deal.”I learned that you can do too much due diligence”By the way I always thought of due diligence as something that you do after you have decided to do something to essentially verify facts that you have determined about the idea not to determine (if I understand what you are saying) whether it is a good idea or not.

  31. Boris Wertz

    If I always got the opportunity to make up for due diligence “mistakes” by paying a 50% mark-up on the round I passed on, I would take it any day 🙂 Nice story, Fred – didn’t know this about your Feedburner investment.

    1. bfeld

      Fred’s co-investors were delighted to have him / USV given how much they could / would add to the company. This plays itself over and over again – FeedBurner didn’t need the money at the time but it WANTED Fred / USV involved.

  32. JamesHRH

    What was the explanation form the big players?#whymatters

    1. fredwilson

      they didn’t want to be reliant on a third party


    Hmm… I want to propose a different angle. Maybe it’s not about doing *too much* due dilligence? Maybe it was really the conculsions you drew from the information? It appears from the post that you were a sheep. Following the big players opinions..Since I’m always trying to improve my software development process. I use a continuous feedback approach for process improvement. So, if you take the view that *you* failed instead of blaming the amount of research. Then you can maybe improve *your* process. The final conclusion as to whether or not that worked and improved your process will of course be your decision to make..Who knows maybe you’ll soon take “one out of three” successes and turn it into “two out of three” successes!

  34. Irving Fain

    Once something becomes a “sure thing” chances are that it’s already been priced-in or figured into the deal….not so different when you’re looking to start a business in the first place.

  35. jheltzer

    We also passed on the initial round of Feedburner because of a similar conclusion. We didn’t think RSS was conducive to advertising, the primary component of how the company intended to earn revenue at the time. It turns out that we were right about this, but what we missed was that the company built enormous strategic value through the relationships with publishers.The distribution network it built drove the premium exit value. We have since thought about value more holistically and strategically rather than solely financially.

  36. Albert Hartman

    Endless due diligence = sheep looking for a leader.

  37. Shakakai

    I’ve run into this same situation as an entrepreneur more times than I care to admit. “Why can’t we just do this internally or with exisiting tools?” I’ve found it really important to be honest with myself in this situation. Do they have a point? Or are they missing pieces to the puzzle, over-simplifying what you built?

  38. howardlindzon

    ove that you asked….i do…i mean what the hell. Dick is an awesome nefgotiator obviously.

  39. howardlindzon

    woops – LOVE that you asked. damn keyboards.

  40. Reinvent_Ed

    Trust your gut for sure. Conversely, you can absolutely do “too little due dili” as seen by the disastrous AOLTW merger where nearly none was performed. And to be fair, that was a multi billion dollar transaction. With early stage companies, you are 100% correct that you must equally rely on other factors that you astutely point out.Al

  41. Chris Bulger

    Too much diligence? Not sure it’s a matter of quantity – we recently invested in Tongal – one of my best diligence calls was with a major brand manager who had used the site to create her brands one and only TV commercial for 2013. She was happy with the commercial and loved the sub $100k cost and the 7 week turnaround time but said she was NOT planing on using 2014 BECASE SHE VIEWED THE PLATFORM AS TOO RISKY! Coulda been the end of the discussion, but we did a bit more diligence. On further probing we heard that the reason she had gone to Tongal was that her traditional program for 2013 – using a big name agency, spending over $700K over 7 months – had produced a flop! There is always resistance to change – but I like the bet when you have faster (+5x), cheaper (+5x) and better.Perhaps the lesson wasn’t too many questions – but the wrong questions.

    1. fredwilson

      that’s very possible

  42. Chris Phenner

    I told this story to a founder of a seed-stage firm at lunch last week. That founder was concerned (mostly) about being able to close large enterprise deals.I have heard Fred tell this story in-person, and I heard him tell a similar story about USV’s evaluation of Disqus. That’s not to say they ‘made the same mistake’ on Disqus, it’s just to say that both firms’ adoption curves went ‘longer-tail first.’There’s an audio snippet from Fred’s telling of the Feedburner story that is worth hearing if you want to believe his passion for this story — the snippet is this:’And then they *ran the long tail*’ [after USV had passed on the round]The ‘…ran the long tail…’ snippet comes from Fred’s throat (or, heart).I don’t know if USV’s ‘Feedburner Miss’ informed their Disqus investment, and perhaps there’s a different learning (for next Monday?) around Disqus, but the adoption of both platforms follow similar paths (as likely do other USV bets).And I love the ‘onto bigger and better things’ snippet in this post :)This is a great story. DIY BD at its finest!

    1. fredwilson

      we learned from feedburner and that gave me the confidence to do the disqus investment

  43. howardlindzon

    Having coffee with Dick tomorrow at twitter hq. All the feedburner guys are awesome.

    1. fredwilson

      i totally agree

  44. Steven Kane

    An argument in favor of… Small Data? 😉

  45. Dasher

    I wonder if passing too much due diligence may also indicate high ‘consensus’ which means not likely a big win??

  46. shareme

    you may get a replay of those lessons.. I found someone that allows me to push back as mobile app design, modernism visual UX foundations, etc. Its building on a social graph for business but not dev gig application process talk is on going ..should know more by end of May..fingers crossed.

  47. Hashim Warren

    This completely invalidates the customer development process

    1. William Mougayar

      Customer development is between a company & its customers, not its VC’s.

      1. Hashim Warren

        If Feedburner asked the top bloggers the same question, they would have received the same answer – “No, we won’t use this product”

  48. BrinVinn

    These dudes make a whole lot of sense.

  49. mshobe

    I’m simply pleased is still up and running. Some of my finest XSLT. (Some of my _only_ XSLT, but let’s just keep that amongst ourselves.)

    1. fredwilson

      me too!

  50. Vinny Lingham

    Alluding to Bitcoins much, Fred? 🙂

    1. Druce

      hard to do due diligence with DHS and the Fed on whether they’re going to put you out of business.

  51. Druce

    Reminds me of when hedge funds said they would never put their critical data and apps in the cloud… fast forward and they’re putting everything they can into Bloomberg and SaaS, messaging, trading, accounting, research management, client relationship management. Like someone said here, “People don’t know what they like, they like what they know.” You gotta figure what they’re going to like in a year or two.



    1. wannakorn


  53. Jamie Lin

    Fred, this story is awesome.

  54. Alex Liddell

    i must agree with some comments,but not all,i guess we have free speech.keep the comments comming though.

  55. Nicolas Wittenborn

    Ha, I just wrote about a different side of the coin: That you can do too much of the wrong DD. Because in many cases pure research & book smarts can’t reveal what actual industry insights would. In these cases insights beat intelligence.

  56. Mike Prozan

    IKD. I don’t think you did too much due diligence. I think you just didn’t reach the right conclusion with the information you had or were without thinking about it, deferring until Costolo proved his model better. That explains why the investment was so much cheaper before Dick Costolo proved his vision.Congratulations on a successful investment.

  57. Maxine

    Catching up on my reading. Loved this post. Proud of you for your humility and Dick for standing his ground. Two big lessons actually.

  58. jimmystone

    Great post. Feel like so much weight is placed on customer calls when making an investment. As you point out, this needs to be balanced against other factors. Really strong stuff. Thanks.

  59. JamesHRH

    Curation has value and this line explains why.

  60. ShanaC

    emotional reaction. Hatred is a strong emotion. So is love. Indifference is nothing. If you’re evoking effective indifference, you have nothing